The Charities Act 2006 will affect landlords registered as Industrial and Provident Societies, says Elizabeth Davis
Charitable landlords that have provisions for payment of interest on share capital may be affected by guidance from the Charity Commission about their charitable status.
Approximately 2,000 housing associations are registered Industrial and Provident Societies. Of these many are charities and are able to enjoy a range of charity tax exemptions and benefits.
Charitable IPSs are currently exempt from the requirement to register with the Charity Commission and although the requirement to register is due to change this year or next year for many IPSs that have an annual income of over £100,000, any IPS that has a suitable alternative principal regulator, such as the Tenants Services Authority, will remain exempt from the registration requirement.
Exempt charity status does not mean that a charitable IPS is free from the requirement to comply with charity law. The Charity Commission has recently issued a position paper on the charitable status of IPSs that pay interest on share capital, because of concerns that not all arrangements of this nature are compatible with charitable status.
Some not-for-profit IPSs that are set up as community benefit societies have provisions in their rules allowing them to pay interest on share capital. The arrangement commonly operates as a sort of ‘loan finance’ with reasonable rates for borrowing and they need only to pay interest when this is affordable.
The commission has announced that it will consider such payments to be compatible with charitable status provided that the rules include various safeguards. These control the interest rates, curb underlying rights shares may otherwise offer and ensure that the cost of these payments is met before the surplus is determined, which means that the payments are not actually out of profits. This announcement has direct implications for those affected IPSs that will have to register as charities when the new registration requirement comes in.
There are also potential implications for charitable landlords and other exempt charities that pay interest on shares if HMRC decided to follow the commission’s lead and question the charitable status of an exempt IPS that does not restrict its arrangements for the payment of interest on shares in the manner required by the commission.
We recommend that IPSs carry out a review of their rules to ensure that, if they do have the power to pay interest on shares, the commission’s requirements are met and their charitable tax exempt status and benefits remain secure.
Elizabeth Davis is head of charities at Blake Lapthorn